Last week I attended the HBA (Home Builders Association) of greater Austin’s economic forecast. I highly recommend this event. Below are the notes that I took at this event.
Builders and New Construction
Not only are supply chains disrupted but the workforce is disrupted. Builders and subcontractors are competing for workers, says Scott Turner, Riverside Home, HBA President.
It’s taking about twice as long to build a home now than before COVID. Why don’t we get more trades moving to Austin? Housing is in demand across the country and for construction workers, the cost of living here in Austin than most other markets around the country.
The median income in Austin buys you a $340K home. The median home in Austin is $536K. The only market close to Austin that has that value is Bastrop.
The neighborhood of West Campus in Austin is the only place in Austin that has density. It’s the only place in Austin where zoning has changed to allow more density. The area in and immediately around Austin where people work is in downtown Austin. About 200,000 people work in downtown Austin. It’s the 3rd most populous place for workers in the country.
There are 13 plus departments that enforce the zoning rules in Austin. It takes about 4 months to get a building permit. It takes two years to get a site plan to divide a lot. As a comparison, Houston does it in 30 days.
The parks department, last year, decided they were going to raise their fee by 125%. And they didn’t tell anyone. They did that because they can. The code allows for them to do that. This is not an efficient way to do business. This is just one reason why the building codes in Austin need to be updated.
The HBA is doing a study of how permitting fees are priced in Austin compared to other cities. It is expected that Austin’s permitting fees will be much higher than any other city in Texas. It costs 10% of a home’s price in Austin for permitting. Habitat for Humanity, as an example, can’t even afford to build a home in Austin city limits.
The record for building permits issued in Austin was in 1983. Our code changed in 1984. That was when the code was changed and it became harder and less efficient to build a home. That may have been appropriate for the size of our city 30 years ago but Austin is growing at an incredible rate today. That record was finally broken in 2019. After the code changed in 1984, the permits for new construction plummeted. It needs to be addressed.
In 2012, it was decided that we need to change the code. It never happened. The entire process has been held up in a lawsuit that will ultimately be decided by the Supreme Court. This was all brought about by a small group of homeowners. We can supersede this by the super-majority of the city council. 9 out of 10 council votes. We don’t have that.
We are vastly behind in building the amount of homes needed to keep up with demand.
Austin has done a very good job of regulating building so that the median household income family is priced out of Austin. We’re 10 years behind in keeping up with the supply needed for 2018.
Director of Research at SMU, Mark Roberts stated that over the last 100 years the impact of Covid was worse for the supply chain than any other event in the last 100 years, including both world wars. The amount of government stimulus in the US and most of the world was unprecedented.
Austin has a strong economy. Wages are growing almost 5% per year compared to the average of 2.5% in previous years. As more people are spending goods, there are less goods in the warehouse, which leads to business investments. This is one of the best moments for the economy in the past 100 years, excluding recent inflation. We’ve never had a recession in the US where the short-term rates are higher than long-term rates until recently.
Inflation trends over the past two years
In 2020, prices were going down. Overall inflation over the last 2 years was around 3%. The Fed moved the target for inflation from 2 percent to 2.5% over a three-year period. Obviously, seeing recent inflation rates much higher indicates the Fed will raise the interest rates. This will help keep inflation at bay.
Tariffs from pre-covid caused declining world trade and stoked inflation and then came Covid. Lifting tariffs temporarily would help with inflation.
Households are in great shape in terms of the savings rate. They have high savings and low debt. The costs of debt service are much lower now.
Businesses are growing. Demand for goods was strong during the pandemic. Productivity has been strong and both these factors have attracted a lot of overseas investors. The cost of goods was cheaper than most overseas nations.
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State Migration: Why are people moving to Austin?
Florida and Texas are leading the nation. People moving to Austin are mostly from California, Illinois, New York, New Jersey, Minnesota. Lower taxes, cost of living, income taxes, retail sales taxes drive this migration to Austin.
In terms of the unemployment rates, in September 2021, across major cities, Austin had the third-lowest unemployment rate in the US. In the pandemic, it was 12.2 % at the peak of quarantine and now it's around 4%. We’re almost back to where we were pre-pandemic.
Employment sectors that are doing the best are information, finance and insurance, real estate sales and leasing, professional and tech services, management of companies and enterprises, and administration and waste service.
Can the supply in Austin’s housing market keep up with this demand? That’s the big question. We are undersupplied by about 2 million homes nationwide right now. The homeownership rate is dropping, but not because people don’t want a home, because they can’t get one. This is bleeding into the apartment rate and causing rental rates to increase. Normally these two sectors don’t compete with each other. This time they are.
We are down to 2 months of housing supply nationally. Home prices with the highest growing values in Texas are Austin and Dallas. The leasing occupancy rate is around 95%, compared to a normal rate of 93%.
A note about the US economy vs Russia’s economy. It takes about 3 weeks for us to equal the output of what Russia outputs in one year.
Austin Real Estate Sales and Traffic Trend Report
Eldon Rude, HBA of Greater Austin, stated in his portion of the Austin Real Estate Economic Forecast of 2022 that we started 2020 housing market strong, then the pandemic caused it to plummet. Two months later it picked up and peaked in 2021, and started to drop due to lack of inventory. Slightly. In January 2021 we saw this trend again, and again in late July, early August is started to slow down, compared to the rest of the year.
In April and May of 2020, we had an unprecedented number of sales. In 2020 there was very little spec inventory. This makes sense because when the pandemic hit and builder delayed their plans until they knew what was going happen. As the market started to show more certainty, spec builders quickly ramped up so we saw an increase in spec homes in 2021 and now all spec builders are competing over tear-down homes and lots all across central Austin.
The next issue that increased demand in 2021 was from migration from other states. People found that they can work from anywhere and they can move anywhere. They are moving from the cities that have the highest cost of living.
Credit reporting agency data shows that people are moving from California primarily to Texas and Florida. Of those that are moving to Texas, they are moving to the four major metropolitan areas of Texas. This was accelerated after the pandemic. LA, San Fran, NY, Newark, Jersey City, San Jose, Washington, Arlington are the cities most people move to Texas from.
The next surge in demand is the strength of the recovery in Austin from the pandemic.
Tesla has a 1.1 billion Investment and Samsung with 17 billion to build their semiconductor factory. Micron Computer is expected to invest a 45B investment, though not announced or for sure. A day does not go by where we don’t read about a company growing or expanding in Austin.
One category where jobs are flourishing is business and professional services. We are adding between 5 and 10K jobs per year. In 2021, we had almost double the growth of the average. These are high-paying jobs. Unemployment in Austin city limits is 2.9% but even lower in that category. This also causes spinoff jobs to support these positions.
Largest 2021 Leases Signed in Austin
Meta, the parent company of Facebook, leased 589,000 square feet of the entire building of Sixth and Guadalupe. They already have a lot of space. They are making a statement for their need for space in Austin, long-term. This means they are going to make a lot of hires to fill that space.
Amazon leased an entire building next door to their current space in The Domain for a total of $332,000 square feet. Again, making a statement of what they intend to do as far as hiring in Austin.
The New Home Builds in Austin for Homes and Apartments
In the last year, we built 35K units. 25K houses and 10K apartment units.
At the beginning of the pandemic, we had a soft leasing market for a brief period of time. That changed as we finished 2021. Last year we built 11K units and absorbed 18K Rentals and leases went up 27% last year. These people want out of these expensive leases and want to start to build equity. They want to buy.
The Resale Market
In 2012-2019, we had around 2 to 3 months of inventory. In May of 2020, the market took off, and now we have less than a half month's supply in inventory.
Conclusion to Austin’s Real Estate Market
How long do supply chain and labor issues continue? These are huge challenges. What should we be thinking about? How high do mortgage rates go? In November 2020, they were as low as 2.6% and now in February 2011, they were at 3.9%. Rising interest rates are not usually a friend to the real estate industry.
That being said, the rising interest rates over the past 12 months had zero impact on our market. Will a 5% interest rate impact the market? Probably not.
The distribution of sales going back to 2013 shows 46% of sales were under 300K. In 2019, 14% were under $300K. We had a 34 percent increase from November 2020 to 2021. This will certainly (and hopefully) be a lower percentage in the next 12 months and that’s a good thing.
The primary cities we compete for jobs with are Atlanta, Nashville, Raleigh, and Charlotte. Austin blew past them.
Looking at numbers through 2021, it wasn’t that long ago that we had higher than major Texas cities, but not that much. That changed in 2021. This is something we will have to address over time.
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